Business will design the penalty to be imposed under the government’s direct action plan if they increase emissions above business as usual levels, an issues paper on the operation of the scheme says.

Environment minister
Greg Hunt
issued a green paper setting out options for how its $1.5 billion Emissions Reduction Fund will work on Friday.

The paper says the fund will encourage businesses to decrease emissions below their historical business-as-usual levels and penalties for non-compliance will be developed in consultation with industry.

“In addition, a mechanism will be developed in conjunction with business stakeholders to provide incentives not to exceed historical emissions baselines," the paper says.

The fund is the core of how the government plans to reduce Australia’s emissions to 5 per cent below 2000 levels by 2020.

Mr Hunt describes the emissions reduction fund as a “classic market mechanism" using a reverse auction to buy back the lowest-cost abatement.

“Instead of a heavy punitive tax, a buy-back model focuses on activities that reduce emissions," the paper says. “This is the basis of the largest and arguably the most effective system in the world, the United Nations Clean Development Mechanism, which to date has generated approximately 1.4 billion tonnes of emissions reductions."

Sources said the analogy overlooked the fact that the only buyers for Clean Development Mechanism units are companies operating under a binding cap in the European trading scheme.

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The Australian Greens criticised the green paper as “light on detail" - it runs to 60 pages, compared with two volumes for the carbon pollution reduction green paper - and “just more government spin to hide the fact Tony Abbott does not accept the science behind global warming.

“It’s no surprise the Green Paper is light on detail – there’s nothing to talk about. This is just more of the same from a government that doesn’t accept that global warming is real and hurting people already.

“This is a plan to let the big polluters off the hook and to charge tax payers instead," the Greens said.

AiGroup chief executive Innes Willox said the paper raises complex issues around emissions baselines, crediting of abatement and the operation of the auction system.

“The real work for business and government will come in the new year as we work together on a final policy design that can achieve the bipartisan emissions reduction goals at least cost to the economy and without compromising competitiveness," he said.

Mr Willox was appointed to the an emissions reduction fund expert reference group to be chaired by Danny Price, managing director of Frontier Economics, a strong advocate for direct action style schemes, and David Green, chief executive of the Clean Energy Council.